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Consultation document: Possible initiatives to enhance the resilience of OTC derivatives markets
This document is on the record and may be freely quoted or reproduced with acknowledgement. The EACT supports the European Commission’s focus on strengthening financial stability and welcomes any initiatives that can lead to greater market efficiency. We do however have the following serious concerns about the implications of the consultation document:
• Companies use derivatives to reduce risk and not to trade speculatively. As such the existence of efficient and flexible markets in derivatives is a key part of promoting economic growth in within the European Community and elsewhere. Legislation and regulation should so far as possible encourage the development of markets consistently with this role and not inhibit the non-financial sector from its pursuit of financial risk reduction.
• Some of the EC’s proposals, if enacted through legislation and/or regulation, are however likely to have the effect of reducing the effectiveness of the management of 2 risk by companies and lead to higher costs, increased borrowing and additional capital requirements. Mandating that non-financial sector companies only use creditsupported derivatives in their hedging will mean that such companies would need to hold large undrawn credit lines or cash investments and higher capital accordingly.
• If a consequence as noted above is reduced hedging by some companies then there will be increased risk in European business without any economic or social benefit.
• The systemic risk with which the EC’s proposals are concerned arises within the financial sector and not elsewhere in the economy. The failure of a company or indeed a group of companies does not create a threat to financial stability in the way that a bank failure does. It follows therefore that the non-financial sector should so far as possible not be exposed to the adverse consequences summarised above from an initiative that is appropriate for the financial sector only.
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